In the president's and Betsy DeVos's rush to cut federal spending, here's a word about money and inflation.
A lot of people are convinced that government's printing too much money causes inflation. But how much is "too much"? That is difficult to say, but the US money supply has more than doubled in the past few years with hardly a ripple of inflation.
So, how much US money is there altogether right now? It seems like a simple question, but the answer is anything but simple because there are several kinds of US money. There are money categories called MB, M0, M1, M2, and a few other Ms that have meaning only to financiers. As American consumers, we are concerned with only a couple of these, MB and M2.
MB is the monetary base, the number of actual US dollars subject to circulation. US dollars exist in three forms: bank reserves, cash, and treasury securities. The MB money supply consists of only the first two, bank reserves and cash. US dollars originate as the first form, bank reserves, mere account entries created by the Federal Reserve at commercial banks whenever the federal government spends. Some bank reserve dollars are subsequently converted to the second form, cash, when people want to actually hold physical dollars. The third form, treasury securities, are created from reserves when people tuck dollars away temporarily in special federal savings accounts out of the money supply. That third form of US dollars, treasury securities, is also known as the national debt. The monetary base, the MB, currently stands at about $3.3 trillion, broken down as about $1.8 trillion in bank reserves and about $1.5 trillion in paper dollars and US coins, that is, cash. So, total US cash in existence worldwide is only about $1.5 trillion, some of which sits in bank vaults. It sure seems like there should be more. Total actual dollars in existence are that MB of $3.3 trillion plus the $22 trillion in treasury securities for a total of $25.3 trillion total US dollars in existence worldwide. Treasury securities, though, are dollars out of play which is actually anti-inflationary.
M2 is total cash plus the US dollar-denominated total of bank deposits, that is, our checking and savings accounts, the money we use to buy stuff and pay bills. M2 is "money" in the sense that it is what we use for our spending, but except for the cash part, M2 is not US dollars. Instead, it is nothing but bank credit against bank reserves. Reserves are US dollars; deposits are just bank credits against those dollars. Deposits are created by the banks when the federal government spends, in which case deposits are created equal to the reserves created. Deposits are also created when banks lend, but in that case no new reserves are created, that is, no new dollars are created even though deposit amounts increase. Currently the measure of the M2 money supply is about $14.5 trillion. Since $1.5 trillion of M2 is in cash, there are checking and savings deposits of $13 trillion against the only $1.8 trillion in actual dollars sitting as bank reserves. Clearly, banks create money even though they do not create dollars.
So, how much US money is there right now? The answer is that we have $14.5 trillion in deposit "money" (M2), but only $3.3 trillion in US dollars (MB). And what might we conclude from these numbers? First, there are not enough dollars to cash out everyone's deposit accounts, if they decided to do that,without breaking the banks. Second, if creating more money is inflationary, then private sector bank lending, which accounts for a lot more money than there are federally-created dollars, probably is more likely to trigger inflation than is federal spending.
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